You are evaluating Homework 9 x an first two life of 4 two mutual exclusive for

Question

You are evaluating Homework 9 x an first two life of 4 two mutual exclusive for your the end of each of the years and expe lly cash million at an and 1.8 million d net inflows of eight-year life. The expected million in each of the years net cash inflows from the project Yare s2.4 require an initial of and $2.0 million in six years. Both projects you use NPV techniques mi each of the next 12 percent and can be made a to make company's cost of capital is replacements most value to your project's you final decisi You assume that continuous adds the life ends. Which project, eight-year extended basis, company? on an

Explanation / Answer

Hi,

Please find the correct answer as follows:

Net Present Value of Project X on 8 year extended basis:

Net present value = -5.4+3.6/(1+12%)^1+3.6/(1+12%)^2+1.8/(1+12%)^3+(-5.4+1.8)/(1+12%)^4+3.6/(1+12%)^5+3.6/(1+12%)^6+1.8/(1+12%)^7+1.8/(1+12%)^8

=$5.09 million

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Net Present Value of Project Y:

Net Present Value = -5.4+2.4/(1+12%)^1+2.4/(1+12%)^2+2/(1+12%)^3+2/(1+12%)^4+2/(1+12%)^5+2/(1+12%)^6+2/(1+12%)^7+2/(1+12%)^8

=$5.21 million

Since the NPV of project Y is more,it should be chosen over Project Y

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